BORROWING COSTS – OTHER ISSUES

Naipaliwanag ko na nag borrowing costs sa handout sa CFAS under PAS 23. May computation din doon kaya mas magandang basahin
muna iyon bago mag-proceed sa handout na ito.

Ang issue lang na tatalakayin ko dito ay kapag ang qualifying asset ay gagawin nang mas maikli o mas mahaba sa isang tao. “yong
example ko na ibinigay sa CFAS ay exactly one year kaya mas madali ang treatment, though madali rin naman ang treatment kapag
below or more than a year.

COMPUTATION OF BORROWING COST FOR CONSTRUCTION BELOW ONE YEAR

Ang pinakamababgo dito ay ang pagcocompute ng average expenditure. Ang kailangan lang i-consider sa computation ay kung ilang
month sang tagal ng construction. Therefore, hindi automatic na 12 months ang divisor.\

Example

Entity A constructed a building, which qualifies as a qualifying asset, on January 1, 2020. Construction of the building was finished on
August 31,2020. The entity borrows 2,000,000 to specifically finance the construction. It has an interest rate of 10% per annum. Other
borrowings include 3,000,000, 8% note, and 1,000,000 10% loans from bank. The following are the expenditures per month:

Month Amount of Expenditure Month Amount of Expenditure

January 300,000 May 700,000
February 500,000 June 800,000
March 400,000 July 700,000
April 800,000 August 900,000

Required: Compute the capitalizable borrowing costs assuming expenditures are made every beginning of the month.

Computation of Capitalization Rate for General Borrowing

Principal Interest rate Interest per annum

Note 3,000,000 8% 240,000
Loan 1,000,000 10% 100,000
Total 4,000,000 340,000

Capitalization rate = 340,000/4,000,000 = 8.5%

Computation of Weighted Average Expenditure

Month Expenditure Month Outstanding Total

January 300,000 8 2,400,000
February 500,000 7 3,500,000
March 400,000 6 2,400,000
April 800,000 5 4,000,000
May 700,000 4 2,800,000
June 800,000 3 2,400,000
July 700,000 2 1,400,000
August 900,000 1 900,000
Total 19,800,000
Divided by No. of Months 8 months
Average Expenditure 2,475,000

Average expenditure 2,475,000

Sourced from Specific Borrowings 2,000,000
Sourced from General Borrowing 475,000

Capitalizable Interest from Specific Borrowing (2,000,000*10*%*8/12) 133,333.33

Capitalizable Interest from General Borrowing (475,000*8.5%*8/12) 26,916.67
Total 160,250

Compare the computed amount with actual interest incurred and choose the lower amount

Actual Interest on Specific Borrowing (2,000,000*10%*8/12) 133,333.33

Actual Interest on Notes (3,000,000*8%*8/12) 160,000
Actual Interest on Loans (1,000,000*10%*8/12) 66,666.67
Total Actual Interest 360,000

Therefore, the lower amount is the computed capitalizable interest of P160,250.

Journal entry:

Construction in Progress 300,000

Cash 300,000
To record expenditure for the construction.
January.
*This entry will be made everytime na may expenditure. So, kayo na ang ma-entry para sa ibang month

Construction in Progress 160,250

Interest Expense (360,000 – 160,250) 199,750
Cash 360,000
To record capitalization of borrowing cost
and recognition of interest expense.
*Yong part ng intrest paid na hindi capitalizable at sa interest expense ichacharge.

Asset 19,960,250
Construction in Progress 19,960,250
To record constructed asset.
*Ililipat na natin sa asset account ang Construction in Progress kapag tapos na ito. Kung itutuloy nyo ang unang entry para sa lahat ng
expenditures, aabot ito ng 19,800,000 tapos may nakadebit pang 160,250 representing capitalizable borrowing costs kaya ang balance ng
Construction in Progress account ay 19,960,250

COMPUTATION OF BORROWING COST FOR CONSTRUCTION MORE ONE YEAR\

Ang issue naman dito ay kung kailan natin kukwentahin ang average expenditure at an borrowing cost. Per year ang
pagkukwentanito, at medyo kakaiba kapag na ang pagkukwenta ng average expenditure kapag sa period after the first eyar dahil
make-carry over na ung expenditure sa first year papunta sa second year

Example

Entity A constructed a building, which qualifies as a qualifying asset, on January 1, 2020. Construction of the building was finished on
August 31,2021. The entity borrows 2,000,000 to specifically finance the construction. It has an interest rate of 10% per annum. Other
borrowings include 3,000,000, 8% note, and 1,000,000 10% loans from bank. The following are the expenditures per month:

Month Amount of Expenditure Month Amount of Expenditure

January 1, 2020 600,000 February 28, 2021 400,000
May 1, 2020 900,000 March 31, 2021 300,000
October 31, 2020 800,000 June 30, 2021 400,000
December 1, 2020 800,000 August 1, 2021 500,000

Required: Compute the capitalizable borrowing costs for 2020 and 2021.

Computation of Capitalization Rate for General Borrowing

Principal Interest rate Interest per annum

Note 3,000,000 8% 240,000
Loan 1,000,000 10% 100,000
Total 4,000,000 340,000

Capitalization rate = 340,000/4,000,000 = 8.5%

FIRST YEAR (2020)

Computation of Weighted Average Expenditure

Date Expenditure Month Outstanding Total

January1 600,000 12 7,200,000
May 1 900,000 8 7,200,000
October 31 800,000 2 1,600,000
December1 800,000 1 800,000
Total 16,800,000
Divided by No. of Months 12 months
Average Expenditure 1,400,000
Average expenditure 1,400,000
Sourced from Specific Borrowings 1,400,000
Sourced from General Borrowing 0

*Since kasya naman ang specific borrowing, wala munang manggagaling sa general borrowing.

Capitalizable Interest from Specific Borrowing (1,400,000*10*%) 140,000

VS.

Actual Interest Incurred

Actual Interest on Specific Borrowing (2,000,000*10%) 200,000

Actual Interest on Notes (3,000,000*8%) 240,000
Actual Interest on Loans (1,000,000*10%) 100,000
Total Actual Interest 540,000

Therefore, the lower amount is the computed capitalizable interest of P140,000

Journal entry:

Construction in Progress 600,000

Cash 600,000
To record expenditure for the construction
on January 1.

*This entry will be made everytime na may expenditure. So, kayo na ang ma-entry para sa ibang month

Construction in Progress 140,000

Interest Expense (540,000 – 140,000) 400,000
Cash 540,000
To record capitalization of borrowing cost
and recognition of interest expense.

Observe the T-account of Construction in Progress on December 31,2020

Construction in Progress
Expenditure in January 1 600,000
Expenditure on May 1 900,000
Expenditure on October 31 800,000
Expenditure on December 1 800,000
Capitalized Borrowing Cost 140,000
Balance 3,240,000

*Sa 2021, ang 3,240,000 na construction in progress balance ay magiging part ng expenditure

SECOND YEAR (2021)

Computation of Weighted Average Expenditure

Date Expenditure Month Outstanding Total

January 1 3,240,000 8 25,920,000
February 28 400,000 6 2,400,000
March 31 300,000 5 1,500,000
June 30 400,000 2 800,000
August 1 500,000 1 500,000
Total 31,120,000
Divided by No. of Months 8 months
Average Expenditure 3,890,000

*8 months lang ang sakop ng 2021 dahil natapos na nag construction ng August 31,2021

Average expenditure 3,890,000

Sourced from Specific Borrowings 2,000,000
Sourced from General Borrowing 1,890,00
Capitalizable Interest from Specific Borrowing (2,000,000*10*%*8/12)) 133,333.33
Capitalizable Interest from General Borrowing (1,890,000*8.5%*8/12) 107,100
Total Capitalizabe Interest 240,433.33

VS.

Actual Interest on Specific Borrowing (2,000,000*10%*8/12) 133,333.33

Actual Interest on Notes (3,000,000*8%*8/12) 160,000
Actual Interest on Loans (1,000,000*10%*8/12) 66,666.67
Total Actual Interest 360,000

Therefore, the lower amount is the computed capitalizable interest of P240,433.33

Journal Entry for Capitalization of Interest

Construction in Progress 240,433.33

Interest Expense (360,000 – 240,433.33) 119,566.67
Cash 360,000
To record capitalization of borrowing cost
and recognition of interest expense.

Kapag nakumpleto na ang journal entries, ganito na nag manyayari sa T-account ng Construction in progress:

Construction in Progress
Expenditure in January 1 600,000
Expenditure on May 1 900,000
Expenditure on October 31 800,000
Expenditure on December 1 800,000
Capitalized Borrowing Cost 140,000
Balance, 12/31/20 3,240,000
Expenditure on February 28 400,000
Expenditure on March 31 300,000
Expenditure on June 30 400,000
Expenditure on August 1 500,000
Capitalized Borrowing Cost 240,433.33
Balance 08/31/21 5,080,433.33

To transfer to asset account, ito ang journal entry:

Asset 5,080,433.33
Construction in Progress 5,080,433.33